Transportation & Logistics Research David Ross, CFA [email protected](443) 224-1316 J. Bruce Chan [email protected](443) 224-1386 • Modal share shift (air to ground) should continue over time, as the carriers’ ground networks are operating as fast and efficient as ever, and there remains a wider gap in price than service (see Exhibits 1-3 on pp. 5-6). For this reason, we also expect ground rates to rise significantly faster than air rates, especially in regional lanes, over the next several years. • For carriers, the continued air-to-ground share shift will require more effective management—and likely a reduction in the size—of the (domestic) air fleet to avoid significant margin pressure. • Interestingly, Exhibits 4-7 (on pp. 6-7) show highest variance in actual-versus-estimated delivery dates were with the U.S. Postal Service (USPS), although it tended to be beneficial for customers, as most packages ar- rived well ahead of published transit times (which were slower times than published by the competi- tion). While this result indicates that USPS (on-time) service is not as bad as perception, it may mean that USPS is losing out on money that it could be charging for transit times that are faster/better than advertised. • FedEx Ground is significantly cheaper than UPS Ground (for retail customers), while FedEx Express and UPS Air product rates are comparable (on a same-service basis). • We reiterate our Buy ratings on FDX ($111 target price, or 13.5x our CY13 EPS estimate of $8.24) and UPS ($83 target price, or 15x our CY13 EPS estimate of $5.50) based on the companies’ strong positioning in the U.S. and International small package markets, positive pricing momentum, and growing B2C and C2C ship- ment trends, especially as the UPS Store and FedEx Office often offer the retail customer a better experience than the local post office. Our estimates and ratings assume neither company acquires TNT Express. A Parcel Shipping Experiment Our Empirical Comparison of Rates, Service, Network Patterns, and Transit Times Among Parcel Carriers March 2, 2012 In an effort to gain some first-hand insight into the small package business, we conducted an experiment that in- volved sending approximately 100 pieces of equal size and weight to various destinations in the U.S. and abroad. This allowed us to compare, on an empirical basis, the varying price and service levels among the main parcel players—namely, UPS (UPS; $76.89; Buy), FedEx (FDX; $91.12; Buy), the USPS, and a regional parcel carrier. Throughout the exercise, we kept records of costs, service exceptions, network patterns, and transit times, all of which are detailed in this report. It is important to note that our experiment was conducted using retail-rated ship- ments only, and that large shippers typically benefit from substantial rate discounts, which alter the relative attrac- tiveness of carriers. Still, we believe our results provide some beneficial insight on price levels across comparable products. Service, of course, is unaffected by discounts. While our experiment involved only about 100 of the mil- lions of packages that flow through the various parcel networks each day, it gave us a valuable perspective from which to consider some of the larger trends that we have been observing in the industry. Stifel Nicolaus does and seeks to do business with companies covered in its research re- ports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 14-16 of this report.
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• Modal share shift (air to ground) should continue over time, as the carriers’ ground networks are operating as fast and efficient as ever, and there remains a wider gap in price than service (see Exhibits 1-3 on pp. 5-6). For this reason, we also expect ground rates to rise significantly faster than air rates, especially in regional lanes, over the next several years.
• For carriers, the continued air-to-ground share shift will require more effective management—and likely a reduction in the size—of the (domestic) air fleet to avoid significant margin pressure.
• Interestingly, Exhibits 4-7 (on pp. 6-7) show highest variance in actual-versus-estimated delivery dates were with the U.S. Postal Service (USPS), although it tended to be beneficial for customers, as most packages ar-rived well ahead of published transit times (which were slower times than published by the competi-tion). While this result indicates that USPS (on-time) service is not as bad as perception, it may mean that USPS is losing out on money that it could be charging for transit times that are faster/better than advertised.
• FedEx Ground is significantly cheaper than UPS Ground (for retail customers), while FedEx Express and UPS Air product rates are comparable (on a same-service basis).
• We reiterate our Buy ratings on FDX ($111 target price, or 13.5x our CY13 EPS estimate of $8.24) and UPS ($83 target price, or 15x our CY13 EPS estimate of $5.50) based on the companies’ strong positioning in the U.S. and International small package markets, positive pricing momentum, and growing B2C and C2C ship-ment trends, especially as the UPS Store and FedEx Office often offer the retail customer a better experience than the local post office. Our estimates and ratings assume neither company acquires TNT Express.
A Parcel Shipping Experiment
Our Empirical Comparison of Rates, Service, Network Patterns, and Transit Times Among Parcel Carriers
March 2, 2012
In an effort to gain some first-hand insight into the small package business, we conducted an experiment that in-volved sending approximately 100 pieces of equal size and weight to various destinations in the U.S. and abroad. This allowed us to compare, on an empirical basis, the varying price and service levels among the main parcel players—namely, UPS (UPS; $76.89; Buy), FedEx (FDX; $91.12; Buy), the USPS, and a regional parcel carrier. Throughout the exercise, we kept records of costs, service exceptions, network patterns, and transit times, all of which are detailed in this report. It is important to note that our experiment was conducted using retail-rated ship-ments only, and that large shippers typically benefit from substantial rate discounts, which alter the relative attrac-tiveness of carriers. Still, we believe our results provide some beneficial insight on price levels across comparable products. Service, of course, is unaffected by discounts. While our experiment involved only about 100 of the mil-lions of packages that flow through the various parcel networks each day, it gave us a valuable perspective from which to consider some of the larger trends that we have been observing in the industry.
Stifel Nicolaus does and seeks to do business with companies covered in its research re-ports. As a result, investors should be aware that the firm may have a conflict of interest
that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
All relevant disclosures and certifications appear on pages 14-16 of this report.
A Parcel Shipping Experiment March 2, 2012 - 2 - Stifel, Nicolaus & Company, Inc.
Other key takeaways: • UPS Store and FedEx Office both offer a much better customer experience than the USPS. While results will
obviously vary by location, we found the UPS Store and FedEx Office locations to be more customer-service oriented than their USPS counterparts.
• FedEx and UPS have different coverage maps, so what may be a 2-day shipment with one carrier could be a 3-day shipment with the other. Shippers should look at these maps (Exhibits 8-10 on pp. 7-8) before choosing a carrier, as it may save them time and money.
• FedEx Office locations are generally larger and have more traffic than UPS Stores, as they offer more than just shipping and packaging; however, there are many more UPS Store locations, making it more convenient for many.
• Tracking and tracing for USPS is available but for a modest surcharge. While other carriers include this ser-vice “free of charge,” it is likely already built-in to pricing. As a result, USPS may be the only carrier to allow customers to opt-out of the tracking and tracing charge.
• Regional carriers like Eastern Connection (serving the Mid-Atlantic) are a good option for larger shippers moving packages within a regional footprint. They offer good regional transit times, often at lower prices than FedEx or UPS. However, like UPS SurePost and FedEx SmartPost, service is not available to the one-off re-tail shipper.
Notes: Summary of each shipment shown in Exhibits 11-12 on pp. 9-10. Experiment conducted based on 2011 published rates. In the next section, we will highlight our general experiences with each carrier and its retail sales channel, includ-ing what we learned while in the store—directly and indirectly. But first, a brief comparison as it relates to LTL pricing: when we took our packages in (they each weighed the same and fit in the same size box for shipping by each service), on the scale, each weighed in at 5.4 lbs. For pricing, though, FedEx and UPS round up to the nearest pound, resulting in a theoretical 11% increase over what we should have paid were it priced more strictly by the weight. In fact, even a 5.01 lb. shipment would be priced as a 6.0 lb shipment in their networks. In the less-than-truckload (LTL) world, where carriers run similar but less automated networks for heavier, non-conveyorizable freight, carriers are lucky to charge even on a 500 lb. basis for an actual 540 lb. shipment, let alone 600 lbs. The UPS Store • All services always guaranteed (at no additional cost). Next Day Air is guaranteed by 10:30am for higher
density areas (cities) and by Noon for rural areas. Ground service is guaranteed on a day-definite basis by coverage map (see Exhibit 9 on p. 8).
• There are no UPS boxes at the store in which to ship anything. We had to pay for each box used to package our goods, even for overnight shipments.
• We found it interesting that Ground service to Alaska (from Baltimore, MD) is a 4-day guarantee (it must be sent by air); whereas Hawaii is a 5-day guarantee.
A Parcel Shipping Experiment March 2, 2012 - 3 - Stifel, Nicolaus & Company, Inc.
• UPS offers a 3-Day Select product that is a hybrid between air and ground. 3-Day Select basically allows faster delivery to the normal 4-6 day ground destinations.
• UPS Store also handles U.S. mail, so customers can drop off standard mail or ship USPS Priority Mail. The workers offer all services, but for those who want tracking, UPS is the only option. Interestingly, depending on origin/destination pair, UPS may also be cheaper than the USPS (typically for heavier-weight shipments).
• Customers can also buy stamps or rent a mailbox (after all, the UPS Store used to be Mail Boxes Etc). • UPS Store employees handled all of the data input for us – there were no labels for us to fill out and no hand-
writing to worry about. The UPS Store employees make sure the customer information is correct and com-plete, which should translate into fewer lost or returned packages. The process is even easier for returning customers, as the “from” information is already on file and that field is automatically populated on the ship-ping label.
• The store sells the UPS #88 car toy along with paper, boxes, pens, gift wrapping, packing materials and other related items. The store does not buy it supplies from or through UPS, and UPS charges the store for any UPS boxes/envelopes that the store chooses to stock.
• As for setting-up an account to get a discount, that service is not available at the UPS Store. Customers need to talk to a UPS salesperson in order to establish an account, which in turn requires a minimum amount of volume, and likely, a monthly minimum charge for the account.
• No UPS SurePost option available at the UPS Store - that is reserved for larger shippers who use other UPS portfolio products.
• Hours of operation: Monday-Friday, 8:30am - 6:30pm and 10:00am – 4:00pm on Saturday. Parcel pick up happens once per day between 6:00pm - 6:30pm. If the store has an unusually large number of pieces for pickup, they will alert the distribution center, who will then send an additional driver if necessary. If a cus-tomer misses the scheduled pickup and needs a package sent out that night, he can drop it off at a local sort facility until 7:00pm.
FedEx Office (formerly Kinkos) • FedEx Office has a surcharge for using Ground boxes but not for Express boxes, and we were told we needed
to use Ground boxes for our Ground shipments. Express boxes and envelopes are “free.” • Technically, a customer can ship using any variety of box, including using a “Ground” box for an Express
shipment, or vice-versa. However, store employees are trained to discourage this practice, presumably to pre-vent confusion in the sort, but likely also to keep customers from converting from higher-yielding Express to lower-yielding Ground.
• No SmartPost option for shippers at FedEx Office – this remains a product (almost exclusively) for high-volume B2C shippers.
• Service defaults to its “Standard” product which, on average is a service level below the default service pro-vided by UPS (i.e. the UPS Store defaulted us to the more expensive next-day shipping option when we just asked for next-day—we are not sure if this was by store manager design or company design, but it explains the difference in pricing).
• Ground pickup was earlier than Express, and the Express driver could not take our Ground packages, so we
A Parcel Shipping Experiment March 2, 2012 - 4 - Stifel, Nicolaus & Company, Inc.
had to drive to the nearest Ground facility to ensure that all packages went out the same day. It required much debating and calling the manager’s manager before we were able to get the address of the local facility, con-tact the local supervisor, and have him grant us access/permission to drop the packages off ourselves. We noted that there was very tight security at the Ground facility.
• Double labeling—after we filled everything out, the FedEx worker entered it into the system, printed a label and put it on the box. The process seemed redundant to us. The UPS Store was much more efficient.
• Everything would have been much easier with an account number (we have a FedEx account here at Stifel but chose not to use it for the purposes of this experiment). As in the UPS store, we were unable to sign-up for an account as an individual—had to contact a FedEx salesperson.
• Hours of operation (open more days and longer each day than UPS Stores): Monday-Friday, 7am – 11pm and 9am – 9pm on Saturday and Sunday.
Regional carrier (Eastern Connection) • To add a regional parcel carrier to the mix, we used Eastern Connection, since we are based in Baltimore. • Regional carriers typically do not have retail outlets and serve larger regional customers only. However, since
we knew the company, they made an exception for us so we could compare service and rates (even though they have no real retail rates).
USPS (the local post office) • USPS rates are often more attractive for lighter-weight packages but usually not as attractive for heavier pack-
ages. • Customer service was not as helpful with processing the shipments, but they at least stayed open late so that
we could get everything filled out and shipped. • The Priority Mail box is free, but there is a charge for bubble envelopes. • Hours of operation: Monday— Friday, 9am-2pm, 3pm-5pm • The biggest surprise was the amount of time the shipping and labeling process took. There are multiple forms
to fill out for each shipment, especially if one wants delivery confirmation or if shipping is international. • One USPS shipment was sent back to us. When it was returned, the box was in poor condition (and after only
having gone a few blocks!). We paid $113 to send it to London via Global Express Guaranteed® (GXG) on a Tuesday. By Thursday morning, a beat up box was delivered to our office, with a notice that there had been an issue at customs in NYC (basically, the wrong postal code was transcribed, and there was no procedure to check the GXG bill for what, upon inspection, was clearly an error). We reshipped the package and included the data in our overall results.
• The only guaranteed services are next-day express mail and GXG for international (which uses FedEx).
A Parcel Shipping Experiment March 2, 2012 - 5 - Stifel, Nicolaus & Company, Inc.
Exhibit 1: In regional markets, it costs 3x as much for next-day service in air vs. ground
Exhibit 2: In medium-haul markets, sacrificing just one day of transit time can mean big savings
Source: Stifel Nicolaus . Note: UPS Next Day Air is a higher service option than FedEx Standard Overnight, but is what was given to us when we asked for next-day. The comparable product, UPS Express Saver, has a similar core price (excluding packaging) to FedEx.
Source: Stifel Nicolaus . Note: UPS Next Day Air is a higher service option than FedEx Standard Overnight, but is what was given to us when we asked for next-day. FedEx’s comparable product, FedEx Priority Overnight, has a similar core price to UPS Next Day Air.
Shipping$72.11 Shipping
$66.30
Shipping$43.85
Shipping$22.94 Shipping
$11.65 Shipping$10.30
Shipping$10.74
Packaging$3.99
Packaging$3.99 Packaging
$2.99 Packaging
$2.09
$0
$10
$20
$30
$40
$50
$60
$70
$80
UPS Next Day Air
FedEx Std. Ovnt
USPS Express
FedEx 2-Day UPS Ground FedEx Ground
USPS Parcel Post
Ave
rage
Tot
al S
hipp
ing
Pric
e to
Chi
cago
($ U
.S.)
4 Day Delivery
1 Day Delivery
2 Day Delivery
Shipping$36.61 Shipping
$30.30 Shipping$20.05
Shipping$9.57
Shipping$8.43
Shipping$11.10 Shipping
$8.72
Packaging$3.99
Packaging$3.99
Packaging$3.99 Packaging
$2.99 Packaging
$2.09
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
UPS Next Day Air
FDX Std. Ovnt
Eastern Connect. Priority
UPS Ground FDX Ground USPS Priority USPS Parcel Post
Ave
rage
Tot
al S
hipp
ing
Pric
e to
NY
, NY
($
U.S
.) 3 Day Delivery
4 Day Delivery1 Day Delivery
A Parcel Shipping Experiment March 2, 2012 - 6 - Stifel, Nicolaus & Company, Inc.
Shipping$54.85 Shipping
$48.63 Shipping$48.65
Shipping$14.65
Shipping$13.01
Shipping$13.83
Shipping$11.65
Packaging$3.99
Packaging$3.99 Packaging
$2.99 Packaging
$2.09
$0
$10
$20
$30
$40
$50
$60
USPS Express UPS 2nd Day FedEx 2-Day UPS Ground FedEx Ground USPS Parcel Post
USPS Priority
Ave
rage
Tot
al S
hipp
ing
Pric
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Cal
ifor
nia
($ U
.S.)
3-6 Day Delivery
2-3 Day Delivery2 Day Delivery
3%
84%
10%3%
UPS On-Time Delivery Rate
1 Day Early On Time 1 Day Late 5 Days Late
97%
3%
FDX On-Time Delivery Rate
On Time 1 Day Late
Exhibit 4: UPS showed better ground on-time performance than air; packages arrived late on a few air shipments to the West
Exhibit 5: FedEx air service was excellent but saw a ground shipment to CA arrive late
Exhibit 3: Not even showing the very expensive overnight prices, ground is still a big discount to deferred air in cross-country shipments
Source: Stifel Nicolaus
Source: Stifel Nicolaus
A Parcel Shipping Experiment March 2, 2012 - 7 - Stifel, Nicolaus & Company, Inc.
Exhibit 8: FedEx Ground coverage/service map from Baltimore, MD to other points in the U.S.
100%
Eastern Connection On-Time Delivery Rate
On Time
4%9%
4%
55%
23%
5%
USPS On-Time Delivery Rate
5 Days Early 4 Days Early 3 Days Early
1 Day Early On Time 1 Day Late
Exhibit 6: USPS packages often “early” Exhibit 7: Service helps regionals compete
Source: Stifel Nicolaus
Source: FedEx website, reflects outbound shipments from Baltimore, Maryland
A Parcel Shipping Experiment March 2, 2012 - 8 - Stifel, Nicolaus & Company, Inc.
Exhibit 9: UPS Ground service map shows different transit times than FedEx for MD shippers
Source: UPS website, reflects outbound shipments from Baltimore, Maryland
Source: Eastern Connection website
Exhibit 10: Eastern Connection service map shows coverage across the East Coast, with facilities in 19 cities
A Parcel Shipping Experiment March 2, 2012 - 9 - Stifel, Nicolaus & Company, Inc.
Exhibit 11: Eastern Connection and FedEx shipment detail
Source: Stifel Nicolaus
Delivery PriceCarrier Mode City State Country Guarantee Actual Billed Total
1) ►EC Priority Boston MA USA On Time 5.40 lbs 6.00 lbs $43.652) ►EC Priority Smithfield RI USA On Time 5.40 lbs 6.00 lbs $43.653) ►EC Priority Mount Kisco NY USA On Time 5.40 lbs 6.00 lbs $29.854) ►EC Priority Baltimore MD USA On Time 5.40 lbs 6.00 lbs $24.045) ►EC Priority New York NY USA On Time 5.40 lbs 6.00 lbs $24.046) ►EC Priority New York NY USA On Time 5.40 lbs 6.00 lbs $24.047) ►EC Priority New York NY USA On Time 5.40 lbs 6.00 lbs $24.04
8) FedEx International Priority Sydney NSW Australia On Time 5.20 lbs 6.00 lbs $168.949) FedEx International Priority Central Hong Kong China On Time 5.20 lbs 6.00 lbs $151.4610) FedEx International Priority Toronto ON Canada On Time 5.15 lbs 6.00 lbs $102.2411) FedEx International Economy Sydney NSW Australia On Time 5.20 lbs 6.00 lbs $162.3212) FedEx Standard Overnight Salt Lake City UT USA On Time 5.20 lbs 6.00 lbs $83.3813) FedEx Standard Overnight Seattle WA USA On Time 5.20 lbs 6.00 lbs $83.3814) FedEx Standard Overnight Milwaukee WI USA On Time 5.20 lbs 6.00 lbs $71.4715) FedEx Standard Overnight Minneapolis MN USA On Time 5.20 lbs 6.00 lbs $71.4716) FedEx Standard Overnight St. Petersburg FL USA On Time 5.25 lbs 6.00 lbs $71.4717) FedEx Standard Overnight Atlanta GA USA On Time 5.20 lbs 6.00 lbs $66.3018) FedEx Standard Overnight Chicago IL USA On Time 5.15 lbs 6.00 lbs $66.3019) FedEx Standard Overnight New York NY USA On Time 5.15 lbs 6.00 lbs $30.3020) FedEx Standard Overnight New York NY USA On Time 5.25 lbs 6.00 lbs $30.3021) FedEx Standard Overnight New York NY USA On Time 5.20 lbs 6.00 lbs $30.3022) FedEx Standard Overnight New York NY USA On Time 5.15 lbs 6.00 lbs $30.3023) FedEx 2-Day Pasadena CA USA On Time 5.20 lbs 6.00 lbs $48.6524) FedEx 2-Day San Francisco CA USA On Time 5.20 lbs 6.00 lbs $48.6525) FedEx 2-Day Denver CO USA On Time 5.15 lbs 6.00 lbs $46.8126) FedEx 2-Day Boston MA USA On Time 5.15 lbs 6.00 lbs $22.9427) FedEx 2-Day Chicago IL USA On Time 5.20 lbs 6.00 lbs $22.9428) FedEx Ground Los Angeles CA USA 2 days late 5.50 lbs 6.00 lbs $16.0029) FedEx Ground La Jolla CA USA On Time 5.50 lbs 6.00 lbs $16.0030) FedEx Ground San Francisco CA USA On Time 5.50 lbs 6.00 lbs $16.0031) FedEx Ground Denver CO USA On Time 5.50 lbs 6.00 lbs $15.0532) FedEx Ground Boston MA USA On Time 5.50 lbs 6.00 lbs $13.2933) FedEx Ground Chicago IL USA On Time 5.50 lbs 6.00 lbs $13.2934) FedEx Ground Baltimore MD USA On Time 5.50 lbs 6.00 lbs $11.4235) FedEx Ground New York NY USA On Time 5.40 lbs 6.00 lbs $11.4236) FedEx Ground New York NY USA On Time 5.50 lbs 6.00 lbs $11.4237) FedEx Ground New York NY USA On Time 5.50 lbs 6.00 lbs $11.4238) FedEx Ground New York NY USA On Time 5.50 lbs 6.00 lbs $11.4239) FedEx Ground New York NY USA On Time 5.50 lbs 6.00 lbs $11.4240) FedEx Ground Chicago IL USA On Time 5.60 lbs 6.00 lbs $10.30
Shipment Method WeightDestination
A Parcel Shipping Experiment March 2, 2012 - 10 - Stifel, Nicolaus & Company, Inc.
Exhibit 12: UPS and USPS shipment detail
Source: Stifel Nicolaus
Delivery PriceCarrier Mode City State Country Guarantee Actual Billed Total
Shipment Method WeightDestination
41) UPS Worldwide Expedited Sydney NSW Australia 1 day early 5.40 lbs 7.00 lbs $179.3242) UPS Worldwide Express Toronto ON On Time 5.40 lbs 7.00 lbs $113.2543) UPS Next Day Air Seattle WA USA 1 day late 5.40 lbs 6.00 lbs $96.4844) UPS Next Day Air Santa Fe NM USA 1 day late 5.40 lbs 6.00 lbs $92.7045) UPS Next Day Air Milwaukee WI USA On Time 5.40 lbs 6.00 lbs $83.0846) UPS Next Day Air Minneapolis MN USA On Time 5.40 lbs 6.00 lbs $83.0847) UPS Next Day Air Tampa FL USA On Time 5.40 lbs 6.00 lbs $83.0848) UPS Next Day Air Atlanta GA USA On Time 5.40 lbs 6.00 lbs $76.1049) UPS Next Day Air Chicago IL USA On Time 5.40 lbs 6.00 lbs $76.1050) UPS Next Day Air New York NY USA On Time 5.40 lbs 6.00 lbs $40.6051) UPS Next Day Air New York NY USA On Time 5.40 lbs 6.00 lbs $40.6052) UPS Next Day Air New York NY USA On Time 5.40 lbs 6.00 lbs $40.6053) UPS Next Day Air New York NY USA On Time 5.40 lbs 6.00 lbs $40.6054) UPS 2nd Day Air Los Angeles CA USA On Time 5.45 lbs 6.00 lbs $52.6255) UPS 2nd Day Air San Francisco CA USA 5 days late 5.40 lbs 6.00 lbs $52.6256) UPS 2nd Day Air Denver CO USA On Time 5.45 lbs 6.00 lbs $50.7957) UPS Ground Commercial Los Angeles CA USA On Time 5.40 lbs 6.00 lbs $18.6458) UPS Ground Commercial San Diego CA USA On Time 5.75 lbs 6.00 lbs $18.6459) UPS Ground Commercial San Francisco CA USA On Time 5.40 lbs 6.00 lbs $18.6460) UPS Ground Commercial Denver CO USA On Time 5.40 lbs 6.00 lbs $17.5961) UPS Ground Commercial Boston MA USA On Time 5.40 lbs 6.00 lbs $15.6462) UPS Ground Commercial Chicago IL USA On Time 5.40 lbs 6.00 lbs $15.6463) UPS Ground Commercial Boston MA USA On Time 5.40 lbs 6.00 lbs $15.6464) UPS Ground Commercial Chicago IL USA On Time 5.40 lbs 6.00 lbs $15.6465) UPS Ground Commercial Chicago IL USA 1 day late 5.40 lbs 6.00 lbs $15.6466) UPS Ground Commercial Baltimore MD USA On Time 5.90 lbs 6.00 lbs $13.5667) UPS Ground Commercial New York NY USA On Time 5.40 lbs 6.00 lbs $13.5668) UPS Ground Commercial New York NY USA On Time 5.40 lbs 6.00 lbs $13.5669) UPS Ground Commercial New York NY USA On Time 5.40 lbs 6.00 lbs $13.5670) UPS Ground Commercial New York NY USA On Time 5.40 lbs 6.00 lbs $13.5671) UPS Ground Commercial New York NY USA On Time 5.40 lbs 6.00 lbs $13.56
72) USPS GXG International Melbourne VIC Australia On Time 5.23 lbs 6.00 lbs $121.0073) USPS GXG International London UK On Time 5.28 lbs 6.00 lbs $113.7574) USPS Express Mail San Mateo CA USA 1 day early 5.25 lbs $54.8575) USPS Express Mail Chicago IL USA On Time 5.26 lbs $43.8576) USPS Priority Baltimore MD USA 1 day early 5.27 lbs $11.6577) USPS Priority Atlanta GA USA 1 day early 5.26 lbs $11.6578) USPS Priority Boston MA USA 1 day early 4.89 lbs $11.6579) USPS Priority Denver CO USA 1 day early 5.29 lbs $11.6580) USPS Priority Los Angeles CA USA On Time 5.28 lbs $11.6581) USPS Priority Milwaukee WI USA On Time 5.23 lbs $11.6582) USPS Priority Minneapolis MN USA 1 day early 5.26 lbs $11.6583) USPS Priority New York NY USA 1 day early 5.28 lbs $11.6584) USPS Priority New York NY USA 1 day early 5.27 lbs $11.6585) USPS Priority New York NY USA 1 day early 5.27 lbs $11.6586) USPS Priority Portland OR USA 1 day early 5.26 lbs $11.6587) USPS Priority San Francisco CA USA 1 day early 5.26 lbs $11.6588) USPS Priority New York NY USA On Time 5.20 lbs $9.4589) USPS Parcel Post Los Angeles CA USA 5 days early 5.17 lbs $15.9290) USPS Parcel Post Chicago IL USA 4 days early 5.19 lbs $12.8391) USPS Parcel Post New York NY USA 3 days early 5.22 lbs $10.8192) USPS Parcel Post New York NY USA 4 days early 5.23 lbs $10.81
A Parcel Shipping Experiment March 2, 2012 - 11 - Stifel, Nicolaus & Company, Inc.
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A Parcel Shipping Experiment March 2, 2012 - 12 - Stifel, Nicolaus & Company, Inc.
Exhibit 14: FDX Model
(figures in $ millions, except per share amounts)Fiscal Year End May 31 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 1QA 2QA 3QA 4QA 2011A 1QA 2QA 3QE 4QE 2012E 1QE 2QE 3QE 4QE 2013E 2014EREVENUEFedEx ExpressPackage Revenue:
Source: Company data and Stifel Nicolaus estimates
(10) F2Q05 includes a $48 million pretax charge (or $0.10 per diluted share), representing repayment of $29 million to the DOT and the write-off of a $19 million receivable and excludes a $0.04 per diluted share tax benefit from the reversal of valuation allowances on foreign tax credits from prior years (11) F1Q06 excludes $79 million pretax, or $0.15 per diluted share, non-cash one-time charge to adjust the accounting for certain facility leases, $75 million at FedEx Express and $4 million at Corporate(12) F2Q07 excludes $125 million pretax, or $0.25 per diluted share, one-time charge to reflect signing bonuses and other upfront comp of approx. $143mm partially offset by approx. $18mm reduction in variable incentive comp related to the new pilot labor contract(13) F3Q07 includes $0.08 per diluted share, one-time tax benefit attributable mainly to the conclusion of various state and federal audits and appeals and also includes an estimated $0.06 per diluted share negative impact related to severe winter storms in the quarter(14) F4Q07 excludes an estimated $30 million pretax, or $0.06 per diluted share, gain from a settlement with Airbus related to the A380 order cancellation(15) F4Q08 operating profit excludes $891 million pretax ($696 million after-tax), or $2.22 per diluted share, impairment charge at FedEx Services primarily related to change in use of Kinko's trade name and associated goodwill(16) F4Q09 excludes impairment and other charges of approximately $1.2bn ($1.1 billion, net of tax, or $3.46 per diluted share), including an $810mm goodwill impairment charge related to the Kinko's acquisition, $90mm goodwill impairment chargel related to the Watkins Motor Lines acquisition, $10mm of charges related to severance in the FedEx Freight segment, $260mm of aircraft-related charges and other charges primarily associated with aircraft-related lease and contract termination costs, and employee severance in FedEx Express segment
FedEx Corporation Income Statement
Certain prior year amounts have been reclassified to conform to the current year presentation. Differences may result due to rounding.* FedEx Services revenue, operating income and operating ratio included only FedEx Kinko's until F1Q08. As of F1Q08, FedEx Services, including FedEx Kinko's, is a different segment.(1) FY99 excludes net income contributions of $4.9mm by discontinued operations(2) F4Q01 includes $124 million charge ($102 million at FedEx Express and $22 million at Supply Chain Services) associated with curtailing certain aircraft modification and development programs and reorganizing SCS operations
(18) F3Q11 excludes one-time charges related to FedEx Freight network integration of $0.08 per diluted share, or $28mm ($43mm net of effective tax rate of 35.8%)
FY 2012
(3) F1Q02 FASB 142 impairment adjustment of $15.5 million after taxes (or $0.05 per diluted share) to reduce the carrying value of goodwill at a subsidiary of on of FedEx's non-reportable operating segments to its implied fair value
(5) F1Q03 includes an $8 million pretax gain from an insurance settlement(4) F2Q02 excludes $17 million pretax benefit from favorable resolution of a state sales tax matter in the Express division
(6) F1Q04 includes a $26 million aftertax benefit, or $0.08 per diluted share related to a favorable IRS ruling as well as $132 million pretax costs ($82 million aftertax), or $0.27 per diluted share, associated with the realignment of FedEx Express through early retirement and severance programs
(17) F2Q11 excludes one-time charges related to FedEx Freight network integration of $86mm, or $0.17 per diluted share, as well as a $66mm reserve taken for ATA settlement with a net effect of $0.10 per diluted share.
(7) F2Q04 includes $283 million pretax costs ($175 million aftertax), or $0.57 per diluted share, associated with the realignment of FedEx Express through early retirement and severance programs
(9) F4Q04 includes $6 million pretax costs ($4 million aftertax), or $0.01 per diluted share, associated with the realignment of FedEx business units, as well as nonrecurring tax benefits totaling $0.04 per diluted share(8) F3Q04 includes $14 million pretax costs ($9 million aftertax), or $0.03 per diluted share, associated with the realignment of FedEx business units through early retirement and severance programs
FY 2011 FY 2013
A Parcel Shipping Experiment March 2, 2012 - 13 - Stifel, Nicolaus & Company, Inc.
Certain prior year amounts have been reclassified to conform to the current year presentation
Source: Company data and Stifel Nicolaus estimates
(22) 4Q11 operating profit and consolidated income before income taxes excluded the impact of the pension mark-to-market loss related to pension expense recognized outside of a 10% corridor of $827 million, allocated between U.S. Domestic Package segment ($479 million), International Package segment ($171 million), and Supply Chain & Freight segment ($177 million); net of taxes, exlusion totals $527mm
United Parcel Service Income Statement
Effective January 1, 2005, UPS changed its reporting segments and restated income statement and operating statistic financials with no impact on cash flow or earnings back to 2001. Financials prior to 2001 are not on the same basis by segment and product.(1) 1999 Net Income excludes the tax assessment charge incurred in the second quarter of $1.786 billion pretax. The tax assessment reduced 1999 net income by $1.442 billion.(2) 2000 Net Income excludes $139 million related primarily to investment gains. Specifically, a $49 million gain from sale of UPS Truck Leasing subsidiary, $241 million gain on investment held by UPS' Strategic Enterprise Fund in two companies that were acquired by other companies, and a $59 million charge for retroactive costs associated with creating new full-time jobs from existing part-time Teamster jobs.
(21) 2Q11 operating profit and consolidated income before taxes excludes the impact of certain real estate transactions, including a $15 million loss for the U.S. Domestic Package segment and a $48 million gain in the Supply Chain & Freight segment, for a combined impact of $33mm ($20mm after-taxes)
(4) 2002 Net Income excludes $1.114 billion pre-tax in extraordinary items, net ($832 million after-tax). Specifically, a $1.023 billion credit to expense related to the difference between an original tax assessment expense charge recorded in 1999 and the estimated settlement amount now approved, a $106 million restructuring charge in connection with reorganization of non-package operations, and a credit to operating expenses for the elimination of $197 million in vacation liability due to change in accounting methodology.
2010
(5) 1Q03 Net Income excludes $55 million reduction in income taxes ($0.05 per diluted share benefit) due to the resolution of a number of outstanding tax issues. Those gains were partially offset by a writedown for $58 million ($0.03 per share) of UPS's marketable securities, reflecting market conditions.
2011
(15) 4Q08 excludes a $548 million goodwill impairment charge for UPS Freight and a $27 million intangible impairment charge for a customer list in UK domestic package business
(6) 2Q03 Net Income excludes $24 million charge resulting from the sale of the company's Mail Technologies unit, as well as a $38 million one-time tax benefit(7) 3Q03 Net Income excludes $24 million pretax gain on sale of UPS Aviation Technologies in the Non-Package segment as well as $22 million income tax reduction benefit based on a federal court ruling regarding the expensing of aircraft maintenance costs.(8) 4Q03 Net Income excludes $28 million pre-tax ($18 million after-tax) gain for the redemption of long-term debt. In addition, the company lowered its effective tax rate to reflect improvements in state taxes, thus reducing the provision for income taxes. This $39 million benefit has been excluded from net (9) 3Q04 Net Income excludes $99 million credit to tax expense due to the resolution of various tax matters
2012
(3) 2001 Net Income excludes $26 million related to FAS 133 cumulative adjustment.
(16) 1Q09 excludes a $181 million ($116 million after-tax) charge for on the company's DC-8 airframes, engines and parts due to an acceleration of the planned retirement of those aircraft
(10) 4Q04 Net Income excludes $110 million impairment charge ($70 million after-tax) on Boeing 727, 747, and McDonnell Douglas DC-8 aircraft, and related engines and parts, of which $91 million was related to the U.S. domestic package segment and $19 million to the International package segment. 4Q04 also excludes a $63 million charge ($40 million after-tax) to pension expense resulting from the consolidation of data collection systems in the U.S. domestic package segment. In addition, 4Q04 net income excludes net credits to income tax expense of $43 million related to various items, including the resolution of certain tax matters, the removal of a portion of the valuation allowances on certain deferred tax assets on NOL carryforwards and an adjustment for identified tax contingency items.
(17) 2Q09 excludes a $77 million charge for the remeasurement of certain obligations denominated in foreign currencies, in which hedge accounting was not able to be applied. 2Q09 investment income includes $17mm write-down related to certain preferred shares and auction rate securities (marked down to (18) 1Q10 excludes a $98 million restructuring charge related to the reorganization of Domestic Package's management structure - voluntary retirement benefits, severance, and unvested stock compensation, as well as a $38 million loss on the sale of a specialized transportation business in Germany ($99mm after-tax, in total), plus a $76mm charge to income tax expense, resulting from a change in the tax filing status of a German subsidiary(19) 3Q10 U.S. Domestic Package operating profit and consolidated income before income taxes exclude a $109 million gain on the sale of real estate; net income and earnings per share amounts exclude the after-tax effect of that real estate sale, which totaled $61 million.(20) 4Q10 Supply Chain & Freight operating profit excludes a $71mm gain on the sale of UPS Logistics Technologies, partially offset by the exclusion of a $13mm fair value adjustment loss related to the guarantee associated with the sale of a specialized transportation business in Germany that occurred in 1Q10, for a net exclusion of $58mm; net income and earnings per share amounts exclude the after tax-effect of the sale and fair value adjustment, which totaled $32mm, or $0.03 per diluted share
(11) 3Q06 Net Income excludes $87 million pretax charge for a tentative legal settlement involving a wage-and-hour case in California as well as a $52 million income tax benefit related to favorable developments with certain international tax issues.(12) 1Q07 excludes $221 million in pretax impairment charges on Boeing 727 and 747 aircraft, and related engines and parts ($159 million - U.S. Domestic Package and $62 million - International Package), due to the acceleration of the planned retirement of these aircraft. In addition, 1Q07 excludes a $68 million pretax charge ($53 million - U.S. Domestic Package, $7 million - International Package, and $8 million - Supply Chain & Freight) related to the special voluntary separation opportunity offered to about 640 employees to reflect the cash payout and acceleration of stock compensation and certain retiree healthcare benefits under the program. After-tax charges excluded in 1Q07 net income totaled $184 million.(13) 3Q07 excludes $46 million pretax charge ($31 million aftertax) related to the restructuring and disposal of certain operations in France within the Supply Chain segment.(14) 4Q07 excludes the $6.1 billion pre-tax ($3.8 billion after-tax) withdrawal payment to the Central States pension fun in the Domestic Package segment and on the compensation and benefits line
A Parcel Shipping Experiment March 2, 2012 - 14 - Stifel, Nicolaus & Company, Inc.
Important Disclosures and Certifications
I, David Ross, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, David Ross, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research re-port. For our European Conflicts Management Policy go to the research page at www.stifel.com.
Source: Blue Matrix, Stifel Nicolaus For a price chart with our ratings and target price changes for FDX go to http://sf.bluematrix.com/bluematrix/Disclosure?ticker=FDX
Source: Blue Matrix, Stifel Nicolaus For a price chart with our ratings and target price changes for UPS go to http://sf.bluematrix.com/bluematrix/Disclosure?ticker=UPS
A Parcel Shipping Experiment March 2, 2012 - 15 - Stifel, Nicolaus & Company, Inc.
Stifel, Nicolaus & Company, Inc. expects to receive or intends to seek compensation for investment banking ser-vices from FedEx Corporation and United Parcel Service, Inc. in the next 3 months. Stifel, Nicolaus & Company, Inc. makes a market in the securities of FedEx Corporation and United Parcel Ser-vice, Inc.. Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other fac-tors) Stifel Nicolaus' overall investment banking revenues. Our investment rating system is three tiered, defined as follows:
BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other non-U.S. securities as compared to the MSCI World Index. HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-U.S. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value.
Of the securities we rate, 51% are rated Buy, 47% are rated Hold, and 2% are rated Sell. Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking ser-vices for 17%, 10% and 0% of the companies whose shares are rated Buy, Hold and Sell, respectively.
A Parcel Shipping Experiment March 2, 2012 - 16 - Stifel, Nicolaus & Company, Inc.